Saturday, January 15, 2011

A couple of sentences on commodities

As I mentioned earlier, a reader asked me my take on commodities.

Starting with the very important disclaimer that my knowledge of global developments is limited to what I read (in contrast to my Turkey pieces, which depend my own analysis as much as what I read), mainly in the Financial Times and some of the blogs I follow, I would say that the current commodities run is as much based on the forces of demand and supply as a result of market sentiment & animal spirits. 

This is especially true for food, where some key crops seem to be shaped by what's going on in the US. Therefore, there is good reason to believe that the commodities run is more than a short spell and could be with us even when the global easy money conditions are over.

The same can be said of oil as well. But one thing I find puzzling and difficult to fit into this picture is the Baltic Dry Index, which is not following commodity prices...

But I know that I have readers who know about these matters more than I do, so any comments, on commodities or the BDI, would be more than welcome...


Emre Deliveli said...

Here's a comment on BDI from a friend, liberally translated: "BDI is made up mainly from the largest capesize ships, which are suffering from oversupply. There are a lot ships ordered before the 2008 crisis that are now coming out. And you don't see other segments such as panamax and supramax handysize falling down)."

It is great to have friends who know things I don't:) Anyway, too much economics education brings you the instant production diseases, where you are easy to assume everything is assumed instantly, although it is very easy to timely production into any model..

Kidneythief said...

I think as far as Turkey is concerned, if commodity prices continue to rise, the CBT is going to be pretty much cornered. The rise in global agricultural prices and persistently high oil prices would translate into high inflation and a high CA deficit, in which case the unorthodox monetary policy moves by the CBT would backfire.

I believe this to be a significant risk, as I think the new measures rely on a lot of assumptions (some of them behavioral), which may or may not hold. However if the shock comes from the supply side, there isn't much the CBT can do about it.

So the moral of the story would be, confidence is important, but one should not be too confident as to think they can control everything with petty monetary policy.

Also, a nice post on FT Alphaville from awhile back on BDI. It pretty much says the same thing:

Sorry if this was too long....



Emre Deliveli said...

No, it was not long at all; thanks for the great comments.